Client firms bear the costs of training subcontractors in firm-specific assembly skills

Evidence

Specific investment can take other forms, for example in training and skills. In the case of component machining this is relatively unimportant. AS one production manager observed, ‘nobody has a monopoly position in turning or milling.’ There is a degree of skill specificity in the case of assembly work, and the general policy is that employees of the subcontracting firm undergo a period of on-the-job training in the assembly shops of the client firm before undertaking subcontracting on their own premises. In short, the costs of training in specific skills are borne by the client. The hazards implicit in such an arrangement no doubt help explain why so little assembly work is contracted out. — Diego Gambetta, Trust - Making and Breaking Cooperative…, 2581

Categorization

• XREF: Direct illustration of asset specificity and opportunism costs — the precise mechanism behind Milgrom’s and Williamson’s transaction-cost economics, relevant to the reader’s Hardin/Luhmann thesis on observability constraints.